“It also reflects bottom-up risks, given that many speculative-grade corporate borrowers have obtained financing on reasonably good terms for much of the past decade. In looking at 11,947 corporates, we find the proportion of companies having aggressive or highly leveraged financial risk has risen slightly, to 61% [from 58%]. While defaults in recent years have been low, this could change.”

The report says that global debt-to-GDP leverage was higher as at June 2018 than in June 2008 (234% versus 208%). Sectors with above-average debt-to-GDP ratios include advanced countries’ governments and Chinese nonfinancial corporates.

S&P economists see the risk of a US recession in the next 12 months as 20%-25%.

“Nonetheless, we believe the next global debt crisis is unlikely to be as severe as the one in 2008-2009. The risk of contagion (a requisite for a full-blown crisis) is mitigated by high investor confidence in major Western governments’ hard currency debt. The high ratio of domestic funding for Chinese corporate debt also reduces contagion risk. (The terms credit and debt include both domestic and foreign debt).”

The report says the two main sources driving the growth in debt leverage have been advanced-country governments and, “perhaps less well appreciated”, Chinese corporates. The potential contagion risk from these areas can be managed if not contained because:

− Major advanced country governments retain some ability to tax, providing some reassurance to investors on credit prospects in a downturn.

− The Chinese corporate debt buildup represents a very high credit risk, but a substantial portion of debt is owed by state-owned enterprises (SOE):

− China’s economy remains centrally managed and the government has levers to pull.

S&P says that according to its sample analysis, two-fifths of the world’s “aggressive and highly leveraged corporate debt” Is Chinese.

“China has the highest-risk corporate sector among the major economies.

“If we presume China, as an emerging market, presents a higher business profile risk than Europe or the US, then logically corporate risk globally is higher than in 2009. We note, however, China is much less connected with the rest of the world, from a financial markets perspective, than, say, the US. is.”

In terms of what all this means for credit ratings, S&P says that in the past 10 years more financial services and sovereign entities have been downgraded than upgraded, as downgrades have just slightly outnumbered upgrades.

“Additionally, in terms of corporate industries, the median credit ratings by industry either declined or remained unchanged.

“In short, the credit risk of the pool of rated corporate, financial services, and sovereign entities have in general worsened through a combination of downgrades and an influx of newly assigned ratings, the majority of which have been speculative grade.”

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